Industry news: Our take
Is air cargo back in vogue? (09/01/2010)
The primary association for Air Cargo carriers worldwide says that demand is strengthening for both passenger and cargo traffic. Is this increase in demand tied to inventory strategies?
Our take:
The International Air Transport Association says that international air traffic statistics for July were up, and should remain strong through the end of the year. For July, passenger traffic was up 9.2 percent and cargo volumes were up 22.7 percent over the same month in 2009. These statistics were slowing slightly between June and July, but gave enough strength for the sector that analysts are bullish on it.
Analysts are interested in knowing what has been driving air cargo traffic and what lies ahead for the sector moving into the final two quarters of the year. First, the comparisons for the sector will begin to get more difficult. In the final half of 2009, companies realized that they had done a good job of reducing inventory levels, and as the global economy began to improve throughout 2009 and early 2010, these companies moved aggressively to replace inventory shortages. Using air cargo to fill gaps in inventory without leading to an overstock situation--avoiding larger load sizes--became a more comfortable trend, and led to a significant rise in air cargo volume. Therefore, year-overyear comparisons for the segment will get tougher.
Second, companies are likely to get right back into the same mode they were in at the end of last year. Going into the season much lighter than usual in inventory, there are likely to be some similar restocking trends occurring later in the fourth quarter or most certainly in the first quarter of 2011. Unless conditions in the economy significantly change for the better, inventory control strategies will likely continue to be most popular.
The industry itself is forecasting that volumes will be weaker for the remainder of the year, anticipating more of a global slowdown than just that being experienced in the U.S. Of late, Asian air cargo volumes have helped to boost the entire industry--European volumes being among some of the weakest. With certain parts of the global economy rebounding and the need to control inventories tightly continuing, there could be more volume than expected, keeping year-over-year growth rates flat to slightly improving over the course of the rest of 2010.
Manufacturing index shows contraction in Philadelphia region (08/25/2010)
China economic activity slowing--Just a breather? (08/18/2010)
Maritime activity increases in July; Import volume drives growth (08/11/2010)
Beige book provides uncertain snapshot of U.S. economy (08/04/2010)
Leading Economic Indicators: crystal ball into second half of 2010 (07/28/2010)
Hurricane early warning system--Just a click away (07/21/2010)
Transportation capacity tightening causing pre-peak season challenges (07/14/2010)
Container shortage to create challenge starting with July peak season (06/30/2010)
Conference Board report on future economic activity (06/23/2010)
Container traffic up 16 percent in June (06/16/2010)
Manufacturing strength continues in May (06/10/2010)
Will this hurricane season be the worst one on record? (06/03/2010)
How might the Gulf Coast oil spill impact shipping? (05/26/2010)
Consumer confidence still in the trenches despite strong economy (05/19/2010)
Retail sales weaker than expected--What does that say about the U.S. consumer? (05/12/2010)
Oil prices up on volatility--outlook for the rest of 2010 riding the same wave? (05/05/2010)
Risk of second, larger volcanic eruption. What does that mean for the global supply chain? (04/28/2010)
Production increases but labor softens--what does that say about the recovery? (04/21/2010)
China currency policy change--What impact on foreign trade? (04/14/2010)
Manufacturing expands in March (04/07/2010)
Durable goods report provides “cautious optimism” on recovery (03/31/2010)
Consumer prices relatively tame--for now (03/24/2010)
Baltic Dry Index comes under fire as good economic gauge (03/17/2010)
Oil prices top $80 mark despite growing U.S. stockpiles--Where are oil prices headed? (03/10/2010)
The Conference Board's Consumer Confidence Index dropped unexpectedly to 46.0, from January's revised 56.5 reading (03/02/2010)
Fed raises discount rate--what is it, and what does that do to businesses? (02/24/2010)
Commercial real estate worries--should businesses worry about their lines of credit? (02/17/2010)
Manufacturing index shows strong January upside for the nation's manufacturers (02/10/2010)
Sector Earnings--When does inventory replenishment kick in? (02/03/2010)
Conference Board Leading Economic Indicator Index continues to improve (01/27/2010)
Retail sales higher than expected (01/20/2010)
Manufacturing sector continues expansion in December (01/12/2010)
Oil prices drop temporarily on weak demand. (12/16/2009)
Manufacturing sector continues expansion but growth slows? (12/08/2009)
Consumer spending during the retail season (11/24/2009)
Baltic Dry Index continues to improve (11/18/2009)
Unemployment rate rises to 10.2% (11/09/2009)
Oil prices inch upward--speculation or real market impacts? (10/28/2009)
Consumer sentiment falls unexpectedly in October (10/21/2009)
September retail sales initially coming in stronger than expected (10/14/2009)
Manufacturing Index comes in weaker than expected (10/07/2009)
Weak U.S. dollar impacts trade and prices (09/30/2009)
Business inventories continue to decline (09/23/2009)
Oil Rising on E.I.A. Demand Revision (09/16/2009)
Second Quarter GDP Drops 1.0% (09/02/2009)
China Moves to Change Bank Capital Ratio Requirements (08/26/2009)
Oil Speculation Continues on Economic Growth "Promise" (08/19/2009)
Manufacturing Activity Increases in July (08/12/2009)
Housing Starts Up 3.6% in June (08/05/2009)
Manufacturing index shows contraction in Philadelphia region (08/25/2010)
The "Philly Fed" manufacturing index showed weakness in early August. Why is the Philly Fed index important to the rest of the economic outlook?
Our take:
The Philadelphia Federal Reserve survey of manufacturing measures activity in the Philadelphia Fed banking region. Because of the off-cycle period of time that the Philly Fed index measures, it is one of the early barometers of manufacturing activity for the broader economy. Analysts watch it closely as a potential signal of what they might see in the broader U.S. manufacturing economy after figures are released at the end of August.
The index for August turned negative in the month, falling to -7.7 from a +5.1 in July. New orders and shipments also slowed in August, showing a -7.1 and -4.5 respectively. One of the bright spots for the index is that future sentiment by manufacturers in the region showed that it should turn positive in the next six months. Future New Orders were especially stronger, moving up to 25.7 from a 17.9 figure in July.
Over the past several months there has been a slight disconnect between the Philly Fed report and the Manufacturing Report on Business from the ISM. The ISM has been largely in an expansionary mode, although it has been declining of late. There could be some concern that the Philly Fed Manufacturing Index would signal that the PMI could turn negative in the next month if current trends continue. However, if some of the retail scenarios are correct as well, there could be some very strong inventory rebuilding activity still to come in the next several weeks--a positive sign for both manufacturing and wholesale distribution.
China economic activity slowing--Just a breather? (08/18/2010)
Chinese business activity has slowed in the most recent economic reports. Is this a bad sign for the global economy or just a "time out" for an economy that was growing at nearly 12 percent?
Our take:
One of the fascinating aspects of the Chinese economy is that the metrics being reported often defy rational belief. For instance, the headlines in most business publications suggest that Chinese economic activity is down--and warning signals are being fired off. But when considering the statistics themselves, the story looks a lot more promising.
For instance, China's export volume was down in July in comparison to activity in June. However, it was still 38 percent higher than the same month in 2009. And, analysts point to a slowdown in import growth as a greater warning sign, but those volumes were still up more than 22 percent by themselves.
Perhaps one of the most interesting headlines seen in the press suggested that "Chinese growth slows." It was "just" 10.3 percent in the second quarter compared to a blistering 11.9 percent in Q1.
One strong impact from the activity being experienced in China is the role that this "slow down" will have on the monetary policy side of the economy. The Chinese Central Bank is likely to use this information to release pressure on re-valuing the Yuan. One of the concerns of the Central Bank was an overheating economy that would eventually lead to out-of-control inflationary pressure. With the most recent figures emerging from China, that concern may be easing and it may not be as quick to try and manipulate its currency as it would have done earlier in the year.
Maritime activity increases in July; Import volume drives growth (08/11/2010)
Not surprisingly, maritime container volumes were up in July on a significant rise in imports. What lies ahead for the maritime sector?
Our take:
Container volumes were up more than 15 percent in July largely on the basis of increased imports into the country. One of the questions being asked of the forecasting community is: What is driving current activity outside of normal peak season volumes, and what does the fall season hold for the sector?
July was largely an inventory-building month, as we would typically see in a traditional peak season run-up to the holiday shopping season. With back-to-school inventories largely in place prior to July, much of the increase in volume is anticipatory for a busy peak season, if consumer demand can find solid footing. With increases in automotive imports, high tech, and basic consumer goods, there is some optimism in the shipping industry that the economic recovery will continue to slowly grow throughout the year.
But looking ahead, there are a couple of speed-bumps to watch--and ultimately get over. Retail sales were reportedly weaker in July than expected. This could have an impact on the willingness of retailers to build more inventory in the fall until sales volumes increase and it appears the consumer is willing to spend once again. In addition, the U.S. dollar is dropping against a basket of foreign currencies and could continue to do so--which would make importing more expensive. This might both increase product costs and consumer prices and ultimately slow consumption.
On the positive side, there is an important role that optimism can play in consumer spending patterns. Therefore, another area to watch is the last period of the back-to-school season. If sales volumes increase enough in August to deplete inventory without too much discounting, this could fuel confidence in the recovery and anticipation of a better holiday shopping season. That could create a scramble for merchandise, fuel manufacturing, and increase seasonal job hiring. All of this would create an environment of improved consumer discretionary income and potentially help to increase overall consumer spending. With consumer spending accounting for 70 percent of U.S. GDP, any increase in activity is a sign of a more positive environment for recovery.
Beige book provides uncertain snapshot of U.S. economy (08/04/2010)
The Federal Reserve's Beige Book for the month of June showed that several regions are seeing some near-term weakness in business activity.
What does this hold for the economy?
Our take:
Federal Reserve Chairman Bernanke provided comments during Congressional testimony two weeks ago that foreshadowed what the Fed Beige Book reports said last week. In his testimony, the chairman said that the economy faced "unusual uncertainty" in the face of several different economy headwinds.
Following on those comments a week later, the Federal Reserve's regional banks reported on the nation's economy and reiterated that there is uncertainty in specific markets. More regions around the country are reporting slowing activity with the cause being given that "high unemployment, cautious consumers and businesses, an ailing housing market and an edgy Wall Street have kept the recovery from gaining strength." In addition, discussions last week about the potential elimination of Bush-era tax cuts could put more pressure on small businesses that could see taxes increase by four percent or more next year.
At the crux of the debate over economic softness is the role that the consumer will play in the recovery and whether the U.S. is facing a prolonged recovery period. Consumer spending accounts for more than 70 percent of U.S. GDP activity and is highly susceptible to the pressure from high unemployment levels and tightening credit. As businesses built up inventory earlier in 2010, analysts believe this may just be a breather until the consumer can eliminate some of that excess inventory sitting on retailer shelves since the build-up. Once inventory begins to move again, manufacturing will pick up momentum and the broader economy can take several more steps forward.
But for now, and taking an excerpt from the Beige Book, CNBC described current activity as such: "Retailers reported sales gains, although merchants in some places said shoppers focused on buying 'necessities.' Sales of big-ticket goods were slower. In fact, YRC reports across most regions found that auto sales had declined." Durable goods orders corroborated the report from the Fed, showing weakness in June.
Leading Economic Indicators: crystal ball into second half of 2010 (07/28/2010)
When the Conference Board speaks, businesses typically pay attention. The Index of Leading Economic Indicators (LEI) was down 0.2 percent. What did this latest release of the LEI tell us to expect for the rest of 2010?
Our take:
The Index of Leading Economic Indicators released by the Conference Board (CB) on a monthly basis is designed to provide a forecast for what lies ahead in the U.S. economy for the next three-to-six months. The Index is usually paired with the coincidence index from the CB which shows a composite score for the current economic environment.
The LEI dropped by 0.2 percent in June, suggesting to analysts that follow it that the next three-to-six months will be a moderate rate of recovery. This would echo comments by Federal Reserve Chairman Bernanke who also weighed in the economy citing that the outlook was "unusually uncertain" at this time.
Most economists will agree that we are in a period of recovery. The greatest unknowns are the rate at which that recovery will come and whether it can be sustained. The comments by both the Conference Board and the Fed Chairman suggest that recovery will continue, but likely at a slower rate than previously anticipated.
This is an important finding not just because it impacts the rate of growth for businesses in the U.S., but it also keeps the general economy in an unsafe zone far too long. Any number of significant events can derail recovery when it is bumping along at such a low volume of activity (still generally much weaker than pre-recession levels in the broader economy).
To illustrate, one of the reasons why commercial aircraft climb to high altitudes is that it provides them with plenty of distance between themselves and the ground to recover if there is a problem. At low altitudes, the recovery time and distance is reduced. The economy works much the same when teetering at such low levels... "it is not far enough from the ground to recover without some damage if there is a problem."
There is a silver lining. Pockets of strong growth will be experienced in certain sectors of the economy. Among the industries likely to experience growth faster than GDP is high tech, medical, aircraft manufacturing, transportation, and pockets of the services sector as well as others.
Hurricane early warning system--Just a click away (07/21/2010)
Ever wish you could see hurricanes developing days before they get picked up by the mainstream media? Choose the tool that experts use.
Our take:
For supply chain managers impacted by hurricanes, caught up in shipping through the southern portions of the U.S., July through October can be an impactful time. Whether trying to predict how many additional products to have on hand as a storm approaches a region or to make the decision to divert shipments away from an area of high risk, there are some online sources that give great tracking tools for storms. These sources provide some of the earliest warning predictions that forecasters are able to provide for possible storm formation.
The prime site for seeing visual depictions of possible hurricane and tropical storm formation is at the National Hurricane Center. The map is interactive; rolling over any circled areas of possible storm formation will pop up a textual discussion of the region of concern. Once a storm is labeled as a depression, it can then be clicked on to get several different tools including a three- and five-day cone (prediction of where the storm is headed), intensity, mariner's rule, and many others. Tabs at the top of the map allow you to switch between Atlantic and Pacific theaters.
Accuweather.com also offers up a variety of additional tools for hurricane watching (but refers back to the National Hurricane Center information frequently). The Accuweather information along with detailed discussion of the storms most likely track are here.
And there are many others that also provide good hurricane information. A number of supply chain managers have these sites bookmarked and make it part of their morning to take a quick tour through them to get updates on possible formations or storm track information if a storm is active.
Transportation capacity tightening causing pre-peak season challenges (07/14/2010)
Has the reduction in transportation capacity over the past two years created capacity shortages across various modes?
Our take:
Widespread reports across the transportation industry suggest that the capacity reduction over the past two years has started to have an impact on transportation flows. Bottlenecks have begun to surface in several different modes of transportation from maritime services to over-the-road. The result is a series of bottlenecks in which shipments of retail goods and commodities are being delayed.
Maritime providers are reporting that capacity in certain lanes is now difficult to find and the drayage operations sufficient to meet anticipated demand could be in shortage as well. The rates for ships and containers are still increasing, with a shortage of containers being reported on the West Coast.
Between 15 and18 percent of total over-the-road capacity has been lost in the truckload and LTL sectors of the transportation industry. That loss of capacity is just now starting to really show itself as shippers try to find suitable services for the third quarter of the year. The ATA still predicts that the over-the-road sector will be short 200,000 drivers by the end of 2011 and perhaps as much as 400,000 short by the end of 2012.
There are a number of challenges that supply chain managers face going into the peak season of the year. Among them is the anticipated shortage of capacity. Other items to watch include increasing fuel prices, concerns over inventory control (the need to keep days sales outstanding at a moderate level), and the fluctuating dollar.
With bottlenecks being thrown into the mix, the uncertainty is significantly changing daily routines--placing more emphasis on scrambling for capacity.
Container shortage to create challenge starting with July peak season (06/30/2010)
Reports from Asia suggest that there is a looming container shortage on the horizon. How big of an impact will this have on peak season?
Our take:
Shipping volumes have increased across the globe in the early periods of 2010. Starting just prior to the Chinese New Year break, American and European shippers started to rebuild historically low inventories--creating strong demand for container shipping services. After nearly two and a half years of trying to consolidate an over-capacity situation in the dry bulk shipping industry, capacity is significantly lower than the banner peak season years in 2004-2006.
But this new activity is threatening to cut container availability to critical lows. Ports in China are up more than 50% year over year and volume is more than 22% higher than 2009. Of late, the Baltic Dry Index has dropped significantly in June--a response to global slowing of raw material demand. But that doesn't hold true for the container shipping industry.
What supply chain managers need to watch going into the peak season is the precipitous rise in container demand--with that demand coming on at a focused period in the early third quarter. That will create shortages of containers and force the rapid build-out of potentially sub-par equipment to fill that demand. Container prices have risen significantly already, going from approximately $2,000 a piece to more than $2,700 just recently and taking the cost to ship from China to the U.S. upward with it.
This will also force shippers to consider routing and the back-haul challenges that maritime providers will face in returning containers. Because of this, some analysts are watching distribution patterns and the potential for modal choice changes (likely moving to smaller shipments in air cargo modes for some shippers where it makes financial sense). It is a situation to keep an eye on as it develops through the fall.
Conference Board report on future economic activity (06/23/2010)
The Conference Board issued its most recent outlook for the economy over the next three to six months. What did it say about the health of the economy?
Our take:
One of the important economic barometers that many economists and business managers watch is the Conference Board's Leading Economic Index. The index is a gauge of future economic activity--defined as activity over the next three to six months. For May, the index was up 0.4 percent. This was positive, but a little less than analysts had expected. Interpretation of the reading for May suggests that the economy continues to improve, but the growth is slow and measured.
There were several factors that pulled the index down. The volatility in the stock market, housing, fluctuating currency rates, and consistently high unemployment rates worked to pull the index down. More liquidity floating in the marketplace helped to balance the downward pressure, bringing it in at the 0.4 percent rate. It was reported last week that corporations are sitting on more than $1.2 trillion in cash positions as a hedge against tighter money supply and continued pressures in the banking sector.
Looking forward, there is reason to believe that most industry sectors will continue to see steady improvement through the end of the year. That growth will appear to come in "fits and spurts" but will track in a generally positive direction--barring any catastrophic geopolitical, environmental or financial events.
Container traffic up 16 percent in June (06/16/2010)
West Coast container traffic is expected to be up 16 percent in June. Is this a sign of strong recovery?
Our take:
Container traffic is rebounding strongly for inbound shipments hitting the West Coast, according to a new report out by the National Retail Federation. According to the report,
"U.S. ports handled 1.15 million Twenty-foot Equivalent Units [TEU] in April, the latest month for which actual numbers are available. That was up seven percent from March and up 16 percent from April 2009. May was estimated at 1.16 million TEU, a 12 percent increase over last year as spring products hit store shelves and summer merchandise followed close behind.
June is forecast to remain at 1.16 million TEU but the figure would be up 15 percent from last year. July is forecast at 1.23 million TEU, up 11 percent from last year; August at 1.27 million TEU, up 10 percent; September at 1.31 million TEU, up 15 percent; and October--traditionally the busiest month of the year--at 1.34 million TEU, up 12 percent."
The growth in volume is indeed significant over 2009 and should be taken as a positive. It has led the maritime industry to expect some capacity shortages in certain trade lanes. And, it is likely to suggest to economists that the nation will avoid a doubledip recession if the current trends continue.
But it must be mentioned that the current increase in volume is being measured against a significantly low 2009. Volumes in 2009 were among the worst percentage declines for the industry in memory. Operators with decades of experience said that the decline between 2007 and 2009 was worse than they had ever seen. So, taking a double-digit increase over 2009 is impressive, but far from getting the industry back to historical volumes of activity.
The maritime sector is likely to attempt to keep capacity at a minimum, a move designed to get pricing rationality back into the marketplace. Shippers should watch the maritime markets closely for capacity challenges and significant increases in prices for transportation, even if oil prices are able to maintain currently low levels.
If oil moves upward with economic expansion--as it probably will--the overall cost to move items by all modes will increase.
Manufacturing strength continues in May (06/10/2010)
The Purchaser Manufacturing Index for May dropped slightly but is still strong. Does this signal a softening economy?
Our take:
One of the best gauges of manufacturing in the country is the Institute for Supply Management's Report on Business. The Purchaser Manufacturing Index (PMI) was created to monitor the growth and contraction of the manufacturing sector through various economic cycles. The PMI has proven to be an accurate gauge of broader economic activity because of the critical importance of the sector on the broader U.S. economy.
The index, based on a baseline point of 50 (with anything above a 50 signifying growth), came in at 59.7--a strong showing for the month. However, it was down just slightly from the 60.4 reading from April. That may have more analysts scratching their heads than anything else in the report. Several significant economists had predicted that the U.S. would see this odd softening in the broader economy in the middle of the second quarter, and this index may be another proof point that this was occurring.
Almost every metric in the report was positive. Perhaps one of the most promising metrics from the report was the outlook for New Orders. The metric for New Orders stayed consistent at a robust 65.7 (the same figure from the April report). This shows that even though the significant strength of pending demand in the manufacturing sector was at its 36-month high in April, it continued that pending demand in May. That bodes well for future shipping needs of the manufacturing sector.
Sixteen of eighteen categories tracked by the PMI were reporting growth in May. The only two that showed any signs of weakness were in the petroleum and coal sectors. Much of that weakness was seasonal, coming out of the higher demand winter months. One item to watch in the report is the notion that commodities continue to increase as a result of increased global manufacturing activity. Prices will start to ease up on individual products as raw material costs increase as well.
Will this hurricane season be the worst one on record? (06/03/2010)
The National Oceanic and Atmospheric Association (NOAA) has issued its own forecast for the hurricane season this year, and it is a potential record-breaker.
Our take:
To the degree that the hurricane season has the potential to make a major impact on the U.S. economy and supply chains, the latest report by the NOAA is important.
Earlier this year, Colorado State University professors provided an independent prediction that this would be one of the most active seasons in recent history. The NOAA forecast tops that, predicting that there would be 23 named storms during the Atlantic hurricane season, with three to seven becoming serious enough to be classified as major hurricanes.
The last several years have been "interesting" for U.S. coastal ports. Between competition amongst the various inbound ports, changing global distribution patterns and the global recession, the volumes at U.S. ports are fluctuating. Decisions on which port of call to use could be affected much further by the impact from an active hurricane season. With risks from the Gulf oil spill and the possibility that a hurricane moving through the Gulf could disrupt port operations, many supply chain managers will be keeping an eye on the hurricane activity this season.
There are excellent sources of information for watching hurricanes. Perhaps the best for early warning is to monitor the NOAA National Hurricane Forecast Center.
How might the Gulf Coast oil spill impact shipping? (05/26/2010)
The oil spill in the Gulf could be one of the worst environmental disasters in history. What could it do to the nation's Gulf Coast ports and shipping?
Our take:
Scientists monitoring the oil spill in the Gulf of Mexico had not yet signaled the warning sirens on the Gulf Coast ports at the time of this writing. However, the impact of the slick on the coast is truly a day-to-day event. There is a risk to Gulf Coast port operations from the growing slick, and shipping in the region would shut down at specific ports if shipping channels became clogged with oil deposits.
Two ports seem to be at the most risk: the Port of New Orleans and the port at Morgan City, Louisiana. Between the two, they control nearly seven percent of the goods that flow into the U.S. via maritime modes. More importantly, they provide an alternative geographic location for the importation of goods into the U.S., and their closing would create a significant increase in cost to shippers. Currently, based on proximity to the spill and Horizon well site, the Port of New Orleans is considered to be most at risk.
There is also a fear that lightering facilities that handle the transfer of oil from large supertankers to smaller vessels capable of moving to Gulf Coast ports for off-loading could be shut down. If this happens, a portion of the nation's crude oil offloading would be affected, forcing oil companies to consider moving those stocks to alternative ports for distribution. Again, the cost will increase for everyone that accesses oil in the U.S. if the condition continues to deteriorate.
For supply chain managers, there are two things to keep an eye on. First, the spill is moving further westward but fluctuates on a daily basis. As more plumes of oil are found deep offshore, the risk to the coast becomes more evident and scientists become more confident that we have not seen the extent of the spill's impact even if the well is successfully capped in the next week. Second, the hurricane season is rapidly approaching (the first storm system actually formed over the Caribbean last week). A storm surge from an inbound hurricane would push all deposited oil closer to the shore and risk dispersion.
In short, it is important for supply chain managers who use the Gulf Coast ports to keep a daily eye on the situation.
Consumer confidence still in the trenches despite strong economy (05/19/2010)
Recent surveys suggest that consumer confidence is still at recessionary levels. How long until it improves?
Our take:
A recent Wall Street Journal survey showed that consumer confidence was still at recessionary levels despite strong economic data suggesting that the U.S. left the recession nearly ten months ago. Given strong retail and durable goods demand, this seems to be contrary to actual spending trends.
There has traditionally been some disconnect between consumer confidence and consumer spending during times of volatile recession. Just because the consumer doesn't feel positive about economic conditions, many are still willing to "spend their way to happiness." It's a mindset that confounds economists at times.
Higher prices for fuel, food, and basic items that are necessary to consumers have helped to usher in a wave of negative sentiment. Consumers are also worried about government spending, higher taxes, a negative job market, and uncertainty over the direction of the global economy. It is difficult for many to override these feelings when most of the headlines in the general press reflect the negative side of the U.S. economy and global politics.
Consumer spending still accounts for more than 70 percent of U.S. GDP. Until the consumer is able to truly regain enough confidence to start spending on discretionary items once again, the economy will continue to have a moderately slow recovery.
Retail sales weaker than expected--What does that say about the U.S. consumer? (05/12/2010)
U.S. retail sales were weaker in April than analysts had expected, rising just .5 percent--a full 1.2 percent lower than expectations.
Our take:
Economists have been saying all along that this particular recovery would not be a consumer-driven climb out of the great recession. However, given that consumer spending accounts for more than 70 percent of U.S. GDP, there has to be a modicum of recovery for U.S. consumers or the economy will fail to rebound with any real strength.
The April retail sales figure caught analysts a little by surprise for several reasons. First, given recent consumer-based economic metrics, one would expect the retail spending figures to be much improved. The individual savings rate has been going down while household incomes remained constant or slightly rose. That typically suggests that there will be increased spending by consumers.
Second, general manufacturing activity has been very strong in the first part of the year--the strongest since 2004 by some measures. And, economists had proven that much of that activity had moved beyond the simple rebuilding of inventories coming out of a strong fourth quarter and depletion of inventories to decade low levels. Assuming that the increase in activity was being spurred by real demand, economists had moved on to begin counting the rest of the year as having a strong potential for sharp recovery activity (perhaps "V" shaped).
This retail report is not the "end all" of reports on the consumer. There are many other positive metrics now suggesting that the rest of the year will be a steady climb out of the economic doldrums. But, until the unemployment rate begins to soften and real job growth starts, the consumer will be lukewarm on spending.
Oil prices up on volatility--outlook for the rest of 2010 riding the same wave? (05/05/2010)
Oil prices continue to fluctuate in the mid $80s on an increase in volatility in the oil markets worldwide. A number of factors are working to keep investors and forecasters off balance in predicting where it is headed.
Our take:
Harkening back to the summer of 2008, we start to see some similar patterns developing in the oil markets. Supply worries, fluctuating U.S. dollar values, speculation on a heating up emerging market demand for oil, and an aggressive stock market set on trading in commodities has all added to a volatile environment for oil prices.
The result: Oil prices today probably well outpace actual supply/demand dynamics and now have a piece of speculation built in to the total price per barrel for West Texas Crude.
Of late, there are more volatile swings in the price for oil based on the value of the U.S. dollar. As the dollar falls, the price to import oil goes up--and the price per barrel rises with it. More than supply fears during a natural disaster, changes at OPEC, or unrest in the Middle East, the fluctuation of the dollar is something that creates the most daily swings in price. If oil prices move up sharply, look for changes in the exchange rate.
Analysts are still expecting the average price per barrel to be in the $95 range, although this amount gets adjusted with just about every passing month. The next significant EIA update on oil price forecasts will be offered on May 11. By then, any disruptions in oil transfer in the Gulf due to the BP oil spill will be fully understood and the actions by OPEC will be in the mix as well.
For real supply, U.S. stockpiles of oil continue to hold steady (or slightly increased of late), suggesting that demand is still generally weaker and the availability of oil is sufficient. Given that oil prices continue to inch upward, as U.S. stockpiles begin to show a depletion (which should happen as refiners begin to draw from oil stockpiles to build up summer blend fuel stockpiles), the price of oil is likely to begin to approach the $90 per barrel mark. Analysts believe that it will crest the $90 mark early in the summer then move upward into the mid-nineties by late summer and into the peak shipping season. This will affect a wide range of prices if all forecasts hold true.
Remember that there are a significant number of factors that have both a positive and negative impact on oil prices. It is a complex mix of variables--all of which can have big implications for the supply chain and transportation industries.
Risk of second, larger volcanic eruption. What does that mean for the global supply chain? (04/28/2010)
Scientists are watching the situation in Iceland closely for signs that the Katla Volcano, estimated to have the potential to be ten times more powerful than the current volcanic eruption, could erupt--sending the global supply chain further into disarray.
Our take:
Difficult to pronounce, the Eyjafjallajökull volcanic (EJ Volcano) eruption in Iceland has been equally difficult on the global supply chain over the past week. Costing the international air cargo industry an estimated $2 billion in its first week, the volcano has surpassed the impact of 9/11 on the airline industry. But, scientists are watching a more fearsome volcano just 12 miles from the current eruption. "Eyjafjallajokull has blown three times in the past thousand years," Dr McGarvie senior lecturer at the Volcano Dynamics Group of the Open University said, "in 920AD, in 1612, and between 1821 and 1823. Each time it set off Katla."
Scientists taking seismic readings on Katla are unable to truly distinguish between earthquake activity being generated out of the EJ Volcano, shifting of a glacier that overrides the volcano, and actual magma activity in Katla itself. But activity is up 2,000 percent in recent days. Predictions of an eruption are not forthcoming, but the risk remains.
The impact of the EJ Volcano shutting down European airspace for nearly a week is still being calculated. At one time, six million passengers worldwide were affected, with the total financial impact on the European economy estimated to be between one-quarter and one percent off of GDP for the region. Supply chains have been affected and purchasing behavior is expected to change, with buyers in Europe potentially looking to stockpile more inventories in the event of further disruptions in the near future.
At the time of this writing, the EJ Volcano was not erupting as violently (down to 80 percent of recent intensity), which could signal that the volcanic activity is coming to an end. It is difficult to imagine an eruption of a volcano the size of Katla in modern times, and scientists are not willing to step out and make that prediction. But these situations change quickly, and an ash cloud capable of stopping air travel can swiftly move around the globe. It is a situation to keep one's eye on as it unfolds--and the global supply chain starts to recover from just a "small" volcanic event.
Production increases but labor softens--what does that say about the recovery? (04/21/2010)
Factory production rose .9 percent in February, an increase from the .2 percent rate in January. Yet, weekly jobless claims are rising. What does this all mean for business and the general economy?
Our take:
The figures on factory production probably come as no surprise, given the numerous positive manufacturing and general economic reports that continue to be issued. One of the trends that analysts will be watching is the proposed sustainability of this improvement in production. The Federal Reserve released these figures nearly two full months after the fact, and they came at a time when there was much rebuilding of inventory.
However, there was a bit of bad news for the labor market as claims for weekly jobless benefits moved upward more than expected, coming in at 484,000--a full 44,000 more than expected. Analysts, including government sources, have told the market to take these figures with some skepticism: there are "administrative" reasons for the unexpected increase and weekly figures can tend to be volatile. Even economists not connected with the U.S. government are suggesting that this is a small bump in the road for employment; the general economic trends support job growth.
One factor to watch in the labor markets is the role of technology in improving productivity. According to the latest earnings reports by technology firms, there is significant positive activity in the high-tech sector. Much of this activity is being driven by corporate spending on upgrades to productivity software and systems. Companies are using this period to improve worker productivity without hiring back to levels that existed in the pre-recession era. This happens in every major recessionary downturn.
If current trends hold, this could continue to help productivity rates and production grow, while the labor markets continue to struggle in finding momentum.
China currency policy change--What impact on foreign trade? (04/14/2010)
The Chinese government is considering a change in its monetary policy to allow the renminbi to move more actively against foreign currencies--a move that could strengthen it against the dollar.
Our take:
The Chinese government is faced with a significant situation: its economy is overheating. Given the phenomenal success of its manufacturing sector, GDP growth is posing significant inflationary risk on the country and its economy. As a result, Chinese authorities are more open to discussing a revaluation of its currency policy, a move that would likely lead to some appreciation against the dollar.
Politics and grandstanding aside, this move will have a significant impact on foreign trade between the countries if the volatility in the renminbi works as U.S. officials hope. One goal of the current administration is to double U.S. exports in the next several years. Strengthening the renminbi against the dollar would make U.S. goods cheaper, but would also make Chinese goods more expensive.
This is where much of the concern comes in. There are debates ongoing about the feasibility of a drastic, overnight change in the currency policy which would lead to an immediate appreciation of the yuan (renminbi) against the dollar. This, versus what would be a slow and gradual change between the currencies (and all global currencies for that matter).
For U.S. businesses trading with China and exchanging currency in the process, this is one of the risk management factors that need to be watched. Given other supply chain cost factors (fuel, inventory, total transportation cost, and so on), sourcing managers will have to consider all options. One of the worst things that could emerge early in the transition, if it is not handled correctly, is an environment of daily volatility in the value of the Chinese currency--one that would make it very difficult for managers to control the Total Landed Cost of products in the supply chain.
U.S. exporters should pay attention to the developments in currency policy. If the action works as the U.S. administration hopes it does, it could open up additional markets and make U.S. goods more competitive in the process. That might be a long way down the road and will require some unique approaches to marketing and selling into the Chinese market (not an easy task), and it isn’t a quick transition. These changes will take some time.
Manufacturing expands in March (04/07/2010)
The ISM Report on Business Manufacturing Index for March rose 3.1 percentage points to 59.6 percent, its fastest velocity of growth since July 2004.
Our take:
The ISM report helped boost the market last week as the Purchaser Manufacturing Index posted its best rate of growth since July 2004.
The PMI posted a gain of 3.1 points to hit 59.6 percent.
ISM economists also mentioned in the analysis that an index over 42 percent for an extended period of time typically results in a growth in general economic GDP. The current rate of growth in the PMI would suggest an annual 5.9 percent GDP figure according to the ISM.
One of the more interesting aspects of the report is the growth in U.S. exports for the manufacturing sector--actually showing stronger growth than imports. Given China's new trade deficit posting, the PMI actually corroborates this and supports the findings. If China is one of the key drivers of the PMI, and not necessarily the U.S. domestic market, that could be a nice harbinger of good things to come for U.S. manufacturing.
If there was a negative element of the report, it probably came in the inventory and product cost figures. The cost of materials appeared to increase for manufacturers, showing an inflationary condition building into the cost of goods sold. And, inventories also began to build. If U.S. businesses are still thinking conservatively, many may see the building of inventories as a reason to get conservative on the buying side of the equation once again, which would slow growth a bit.
Lastly, employment seemed to be flat during the month, suggesting that companies were increasing productivity without adding labor. That might have to change if demand continues to increase--but for now businesses are finding ways to get more done with fewer resources. This would also seem to be corroborated with the national employment picture.
Durable goods report provides “cautious optimism” on recovery (03/31/2010)
The U.S. Commerce Department reported a .5 percent increase in durable goods orders for February, the third consecutive monthly increase. But this failed to meet analysts' expectations for a gain of .7 percent.
Our take:
Taking an optimistic page out of the economic forecast book, durable goods orders were slightly better than expected for February. The U.S. Commerce Department reported an increase of .5 percent in February for orders of durable goods. This was the third consecutive monthly increase, but failed to meet analysts’ expectations for a gain of .7 percent. Commercial aircraft, one of the primary factors in the improvement factor rose 32.7 percent, after a massive increase in January. Outside of transportation, orders for machinery rose 4.7 percent, primary metals rose 1.5 percent, and computers were up 0.4 percent. But, there were downsides. Automotive orders dropped by 1.9 percent and orders for communications equipment fell 1.7 percent.
“The 0.5 percent increase in overall orders in February followed a 3.9 percent increase in January and a gain of 1.8 percent in December” according to a report in The New York Times. “The three consecutive monthly gains pushed total orders to a seasonally adjusted $178.1 billion in February.” Economists believe that corporate spending will be the primary driver of economic recovery as the country exits this recession. The slight softening in actual performance vs. analysts’ forecasts for durable goods orders would suggest that some of the more robust inventory restocking may be slowing.
Transportation volumes across most modes still suggest that activity continues to improve in March--but to what degree? If the corporate and consumer demand side of the equation is not present to match this building of supply, orders will continue to be lackluster. The general sentiment on Wall Street remains “cautiously optimistic,” which is probably the best sentiment for the durable goods report.
Consumer prices relatively tame--for now (03/24/2010)
Consumer prices held steady in February with no change. Core consumer prices--which strip out food and energy prices--rose just 0.1%.
Our take:
The risk of inflation on economic recovery is a real concern for the Federal Reserve. Interest rates have been held low for so long that officials fear a rise in inflation that would be difficult to reverse without halting economic recovery, if conditions rapidly changed. For now, it appears that all of the indicators show a tame inflation picture. Despite an uptick in retail, manufacturing, and several other sectors, consumer prices remained flat, to only slightly increasing, in the core price arena.
However, looking at March, gas prices are beginning to increase, which would translate into higher costs for producing and transporting all types of goods to market. With higher oil and energy prices starting to seep into the market, the consumer price index should show an increase for March, even if the core consumer price index drops.
One item to watch in the coming month is the impact that a drop in household wealth, increased state and local tax activity, and a slightly increasing initial jobless claims report will have on consumer spending. In other words, even if inflation remains flat and reserved, personal household wealth may still continue to fall as the consumer dollar gets stretched between more obligations. Some taxation impacts are not included in the Consumer Price Index. And, given the budget deficits being run by the state and federal governments, increased taxation to help steady deficits will likely come about.
So, the complete impact of economic pressures on consumer discretionary income is not fully being realized. This will come out in retail figures and housing activity in the coming months, but will likely be masked by increases in these sectors. Those increases will simply be weaker than expected.
Baltic Dry Index comes under fire as good economic gauge (03/17/2010)
Our take:
The Baltic Dry Index (BDI) is one of the oldest indexes of global supply and demand known. Started in the 1700s, it tracks the price to move key commodities in the top trade lanes in the world. Because these commodities represent the early-stage manufacturing raw materials, it is being used more frequently as a broader early-indicator gauge of global economic activity. But its accuracy for predicting broader economic activity is in question.
The BDI spiked to nearly 11,800 during the summer of 2008 when oil prices hit $147 a barrel. It then plummeted to just 667 by the spring of 2009 as the bottom fell out of the global economy and shipping worldwide ground to a halt. Analysts are now concerned that a massive over-ordering of new vessels from 2006-2008 has created an industry anomaly that makes the index inaccurate in predicting global economic activity.
Looking at the chart
As the current administrator for the BDI said recently (essentially), the BDI was created to measure the cost of transporting key goods across key trade lanes. Any other use than that is speculation and should be treated as such. Well, speculation or not, the BDI remains one of the better early indicators of global economic activity and should be paid attention to.
Oil prices top $80 mark despite growing U.S. stockpiles--Where are oil prices headed? (03/10/2010)
Oil prices continued to move upward last week, eclipsing the $80 mark despite U.S. stockpiles of crude oil and refined gas climbing in the same period.
Our Take:
A number of counterbalancing trends are working on oil prices at a time when prices should seemingly be dropping. As the economic recovery of the U.S. struggles to find firm footing, oil prices continue to increase and now hover in the $80 per barrel range.
There are several items that should be pulling the price of oil downward. First, the jobless rate in the U.S. is still significant enough that commuter traffic is down, decreasing gas and diesel consumption. And second, U.S. crude inventory stockpiles continue to grow--up by more than 4.1 million barrels.
However, counteracting that downward pressure on prices were several conditions. On the demand side of the equation, Chinese consumption of oil is up nearly 2 million barrels a day and the country is expected to sell more than 12 million new vehicles in 2010, many of these ultimately triggering first-time auto buyers and increasing demand for oil. Also, the U.S. consumer has shown some important resilience of late, adding to speculation that U.S. demand will increase as well.
On the supply side, geopolitical problems continue in Nigeria and uncertainty in the Middle East has still kept markets on edge. Volatility in the U.S. dollar has also added to the pressure on oil prices. As the dollar falls against foreign currencies, the price of oil rises and vice versa.
So where is oil headed? Many analysts and the Energy Information Administration (EIA) believe that oil prices will hit at least $95 per barrel before the year is over. Yet, EIA believes that current prices are overvalued for the current market conditions. But given the growth of Chinese consumption and the projected improvement in the U.S. economy later in 2010, prices have greater potential to go well northward of current levels.
Read more here.
The Conference Board's Consumer Confidence Index dropped unexpectedly to 46.0, from January's revised 56.5 reading (03/02/2010)
The latest survey from the Conference Board is disturbing for those that felt the economic turnaround was in full swing. The index had been rising for the last three months and in January had reached a reading of 55.9. Most analysts expected the index to come in at 55, making the plunge to 46 completely unexpected.
With 70% of the U.S. economy being driven by consumer spending, the drop in the confidence number is of significant concern. But, as with all surveys of the often complex consumer, there are caveats. The consumer is subject to the whims and moods of the moment when they are polled. And lately, the general news in the media has been negative on many fronts, creating some question as to the strength of economic recovery.
The Conference Board survey showed that the overwhelming rationale for the drop in confidence was fear that the job market would deteriorate further. This past week, a Gallup poll suggested that the Government figures on unemployment were understated and the “effective” unemployment rate (those underemployed or those that have quit looking for a job altogether) is now at 19.9%.
Yet, the consumer is now sending mixed messages. Consumers are obviously reacting most significantly to the overall impact that unemployment has had on the economy. Yet, on the other side of the coin, the latest reports from the retail sector have been more positive than they have been in many months. Major retailers in the home improvement sector reported that sales had started to recover and there were solid reports from many retailers coming out of the Valentine's Day weekend showing more traffic and improved sales.
So which is it? Is the consumer conflicted again?
Is what they say more important than what they do--or is it just the opposite?
To a manufacturer, the answers to these questions are critical.If the consumer is really just re-stating the concerns they are hearing in the press and are actually feeling a bit better about their personal situation, they may be more willing to spend. If the reaction being reported from the polls is more accurate assessments of consumer attitude, the inventory build will be coming to an end soon and retailers will once again be sitting on inventory. More here.
Fed raises discount rate--what is it, and what does that do to businesses? (02/24/2010)
The Federal Reserve raised the “Discount Rate” from .50 to .75% last week. The move rocked global stock markets--but isn’t intended to affect consumers. Yet, it could affect businesses and consumers alike.
Our Take:
During the economic crisis, the Federal Reserve used one of its powers to lower interest rates for emergency loans that are made to banks, to help them shore up balance sheets and remain solvent. That rate had dropped to .50% over the past two years, but was raised one-quarter of a percent back up to .75% last week. The move has rattled global stock markets. However, this is not the key Federal Reserve Funds Rate (the rate that is applied to funds transferred between banks overnight). The Federal Funds rate has a more direct impact on consumer and business lending. The Fed reiterated that this move on the Discount Rate does not signal that it will raise the Funds Rate anytime soon.
Markets are jittery after the announcement by the Fed. The Discount Rate will ultimately force banks to not rely on the Fed for boosting their balance sheets. In other words, it forces them to survive and thrive on their own--or pay a hefty price to get Federal aid. That move will tighten the lending policies for many banks overall, especially those that are not as fiscally stable. Over time, this will change the profitability of those banks using the Discount Rate and will tighten their lending practices. In the near term, there could be some tightening of lending practices to both consumers and businesses as a result.
The Federal Reserve stated that this was not a move to slow the economy (the worry being inflationary threats). But, the general marketplace is taking it as such. To counter those fears, the Fed made a statement that has perhaps worried the market more than anything--that the recovery is looking like it will be prolonged and slow. The agency admitted that it may keep the Funds Rate unchanged for most of the year. Once the market settles down after this action to raise the Discount Rate and wean banks off of Federal aid, many people will be watching for further implications of what a slower recovery might mean for business. Read more here.
Commercial real estate worries--should businesses worry about their lines of credit? (02/17/2010)
Estimates show that approximately $1.4 trillion in commercial real estate debt will come due over the next four years. Almost half of that is considered to be at risk of default.
Our Take:
The growing concern over the commercial real estate markets is beginning to catch some momentum. A report issued by the Congressional Oversight Panel administering the TARP program last week had alarming language in it--suggesting that the trickle-down and ripple effects of a looming crisis in the commercial real estate markets could weigh on financial markets.
Essentially, there is more than $1.4 trillion in commercial real estate debt, a big portion of which is held by small and medium-sized regional banks. Of this amount, nearly half of it is now considered to be at risk because property values have dropped enough that the loan value now exceeds the appraisal rate of those properties. As default rates move higher and banks work to balance debt ratios, something will have to give. This will likely come in the form of tighter lending practices for businesses that borrow from lending institutions that must go through this balancing act. In other words, working lines of credit may tighten for businesses or they have to seek alternative sources for working capital.
There are a number of things that can help to remedy the situation. The Federal Government could step in to help take a significant amount of the burden off of smaller institutions--those at the most risk from commercial real estate defaults. There has also already been a wave of foreign investment sweeping into the country purchasing commercial real estate that is currently far undervalued. Whether these investments will be enough to stem the tide of defaults that will come is likely the $700 billion question. For now, the mainstream media is beginning to cover the coming wave of commercial real estate adjustments that will sweep the banking industry. But, not too many people are willing to throw cold water on an economy that is starting to recover. So, this story may continue to fly somewhat low over the horizon for a while. Get more details at: http://www.cnbc.com/id/35352337
Manufacturing index shows strong January upside for the nation's manufacturers (02/10/2010)
The ISM's PMI rose sharply in January to 58.4%, its strongest showing in nearly 6 years. What is driving the PMI and what can we expect from it?
Our Take:
The Institute for Supply Management issues a Purchaser Manufacturing Index (PMI) which tracks the overall strength of the U.S. manufacturing sector. Historically, the PMI has proven to be accurate in predicting the direction of growth in the manufacturing sector and the prospect for the industry moving forward (through trending). The PMI has steadily risen over the past eight months, and recently hit its highest mark since August of 2004 at 58.4%. The overall index is up over December's figure of 54.9%.
Manufacturers and retailers are mostly responding to market conditions in which inventory levels of many have hit all-time lows. As a general rule, managers of inventory have opted to reduce their inventories going into the early part of 2010. As demand sets back in, these same companies have begun to engage in some preliminary re-stocking activity. Even if this inventory re-stocking activity begins after the January period, the early-stage activities of the sector had to begin in January. That January activity is largely being reflected in the January PMI figures.
Looking ahead, the big question for many retailers, wholesalers, and OEMs is how strong demand would come on in the latter part of the first quarter.
If the unemployment rate and other discretionary spending impacting events hits the consumer (such as oil prices, taxes, inflationary effects on food, etc.), there could be a rebuilding of inventory that takes place without the corresponding strong rebound in consumption. Until the strength of the economic recovery can be determined, the PMI is likely to expand and contract accordingly with swings in inventory build-ups and sell-downs--which will be a bit more volatile than in years past.
The ISM report is a strong index with much information on the manufacturing sector and other factors (such as employment, productivity, inventory, new orders, etc.). To get more information, please go to the ISM site at this link: http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942.
Sector Earnings--When does inventory replenishment kick in? (02/03/2010)
The over-the-road sector has had a challenging year as U.S. businesses kept inventory levels extremely low. With some hints of economic recovery, when do U.S. businesses restock?
Our Take:
Fourth quarter earnings reports show the slow rate of inventory replenishment by
companies in the U.S. Across all trucking modes, there were general declines in both
tonnage and profit as retailers and manufacturers continue to keep a conservative
approach to inventory management.
Analysts watching the retail and manufacturing sectors still speculate that there will be a rebuilding of inventory levels in the middle of Q1, but the size and magnitude of that rebuilding effort is uncertain.
Retail sales in the fourth quarter were slightly weaker than expected, and with the unemployment rate still climbing, there is concern that the consumer may be slower to return to healthy spending levels.
The nation's retailers will use projections of consumer activity to determine how much inventory to replenish, and many do not expect it to return to pre-recession inventory levels.
The transportation industry seems to be taking the reduction in business activity equally across all modes. No specific mode of transportation seems to be faring any better than any other. The rail sector benefits a bit more than others during the winter months because of the movement of energy supplies across the country--but has suffered the same reduction in volumes in the intermodal segment as other modes.
All eyes will remain on inventory replenishment levels for retailers and manufacturing, the housing market, and a recent increase in durable goods activity. Explore further at: http://www.reuters.com/article/idUSSGE60Q0MP20100127
Conference Board Leading Economic Indicator Index continues to improve (01/27/2010)
Conference Board Leading Economic Indicator Index continues to improve. The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 1.1 percent in December, following gains in November and October.
Our take:
The Conference Board’s figures have its share of proponents and opponents. Since the index takes into account a significant number of different economic factors, there is some macro economic value in the general direction the index is taking. How it may or may not apply directly to a specific industry is yet a different story.
The official press release from the Conference Board shows that the areas helping the index grow in December were: “interest rate spread, building permits, average weekly initial claims for unemployment insurance (inverted), stock prices, index of consumer expectations, index of supplier deliveries (vendor performance), money supply and manufacturers' new orders for non-defense capital goods.” Essentially, there were a number of indicators that help to boost portions of the economy--those that should help to drive growth. But there are still a lot of questions about job growth.
Just last week, there were concerns that the weekly jobless figures are showing a more aggressive loss of jobs than analysts had expected. By the end of the month, the net change in the unemployment rate will be weighed against seasonality to truly determine whether that portion of the economy is improving. Job growth or loss is considered to be a lagging indicator, businesses reacting to economic activity make decisions to expand or reduce the workforce based on actual activity. Seeing the unemployment rate continue to decline is a negative input.
But, there are reasons to believe that the Conference Board’s Index is working. The Purchaser’s Manufacturing Index was still in a growth state in December. Future orders were still showing strong demand last month as well. Inflation remains in check and energy and commodity prices are relatively moderately priced. And several other factors give us either: 1) optimism that the worst is behind us and growth is ahead; or 2) that there are positive green shoots that (barring any activity to reverse course) will provide growth in 2010 for some sectors.
The economic picture in the U.S. and abroad is complex. For businesses, general sentiment starting to emerge is that there are reasons to expect economic improvement throughout the year--again, barring any major regulatory, environmental, or geopolitical crises. The Conference Board’s LEI is just another input that gives us some reason to hopeful that the best is truly ahead of us.
Get further details at: http://www.prnewswire.com/news-releases/the-conference-board-leading-economic-indextm-lei-for-the-us-increases-again-82251487.html
Retail sales higher than expected (01/20/2010)
Retailers exceeded analyst expectations in general, reporting stronger sales growth in December, despite continued pressure on consumers and a high unemployment rate.
Our take:
There was a significant amount of consumer psychology involved in this year's figures.
Despite an unemployment rate that was higher than this time last year and less consumer credit capacity, sales still increased over last year. Assuming that the recession started in earnest in the fall of 2007, many consumers were going into their third difficult Christmas. Many simply decided that they were not going to go without some celebration.
But, retailers also took on a different strategy for 2009.
Many cut inventories to low levels going into the season and limited sales and discounts as much as possible--while still promoting enough to get shoppers in stores. But consumers waited until the true last minute this year, perhaps in an attempt to take advantage of last minute discounts.
The area that analysts will be watching is the amount of additional gift certificate activity that comes in January as consumers redeem what is expected to be an even better gift card season.
Again, consumer psychology plays a role here. Many families, coming on hard times over the past year, will likely get more gift certificates. This allows the recipient to spend those funds on items that they need, more than in normal years when expenditures were on more frivolous types of items. This would also help to explain why apparel spending was higher in the season.
Looking ahead, retailers will have to do some significant inventory rebuilding in the spring.
In addition, the cold weather snap has pushed sales of winter merchandise to levels not seen in years. The latest "Arctic Clipper" is affecting 38 of the 48 contiguous U.S. states--pushing sales for retailers to better levels than average for January--in those categories. Find out more at: http://www.cnbc.com/id/34745479.
Manufacturing sector continues expansion in December (01/12/2010)
The Institute for Supply Management (ISM) released its Report on Business for the manufacturing sector and the survey indicated that the index grew from 53.6 in November to 55.9 in December.
Our take:
The Institute for Supply Management's Report on Business for December reflected the general sentiment for the economy--showing that optimism has set in for 2010. The PMI (Purchasing Managers Index), a key gauge of manufacturing activity in the country, increased to 55.9--a sign that the manufacturing sector is expanding. The index had softened in November, dropping to 53.6. Analysts pegged this change to a drop off in automotive activity after the replenishment of inventory following the Cash for Clunkers program in July and August.
Looking at 2010, there are a couple of items that need to be monitored closely--to see if the recovery is sustainable. First, capital availability for small business is still a key concern. If capital remains tight as it is at present, which would slow the purchase of equipment and slow the growth of the manufacturing sector. Second, the rate of inventory replenishment is going to be monitored closely as well. If retailers determine that growth in 2010 will sustain higher inventory levels, they will begin to rebuild those levels from an extremely low inventory base currently. Those efforts would spur more activity. But, the reverse could take place if they remain conservative for a while longer, and manufacturing could lag early in 2010.
Lastly, there is evidence that supply chain managers are looking to more near sourcing, producing more of the goods consumed in the U.S. within the U.S. The majority of importers will continue to import heavy volumes from Asia and abroad, but will begin to bring a small percentage of their purchasing closer to the U.S. market to help provide risk mitigation against rising fuel prices or a weak U.S. dollar. In all, the report for December was positive and will certainly help boost optimism going into 2010.
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