21st January 2011 by Shaun Richards
We received yesterday some new information on the state of the US economy as we begin to get some suggestions as to the shape it will be in over the early months of 2011. There was the regular weekly figures for jobless claims from the Department of Labor which came in as follows.
In the week ending Jan. 15, the advance figure for seasonally adjusted initial claims was 404,000, a decrease of 37,000 from the previous week’s revised figure of 441,000. The 4-week moving average was 411,750, a decrease of 4,000 from the previous week’s revised average of 415,750.
This leaves me with several thoughts. The first is that the Department of Labor may have trouble with its seasonality as the way last weeks and this weeks numbers have varied looks strange. The second is that if we concentrate on the more reliable four-week average we now have a trend which with some ebbs and flows has now been declining for the last few months. This is good news for the US economy although the silver lining does come with a cloud. As we stand if we continue to get such numbers they are of a level which should stop unemployment increasing but are not yet enough to contribute to a sustained fall.
The Philadelphia Fed Survey
This is a business outlook survey which is conducted in the region of the Philadelphia Federal Reserve and it reported this on a scale where anything above zero represents growth.
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged down slightly from a revised reading of 20.8 in December to 19.3 in January………………….The new orders index increased 13 points this month, the fourth consecutive monthly increase……..The current employment index increased 13 points, and for the fifth consecutive month, the percentage of firms reporting an increase in employment (25 percent) is higher than the percentage reporting a decline (7 percent).
So we can see that a positive initial claims report was followed by a Philly Fed survey which was positive too and the Philly Fed survey often correlates well with other figures to come for the US economy. However before I move on there were signs of inflation rising in the report although as raising it is a target of the US central banks policy you can argue that this is both good (the policy is working) and bad ( part of the general world trend to higher prices).
Price increases for inputs as well as firms’ own manufactured goods are more widespread this month. Fifty-four percent of the firms reported higher prices for inputs, compared with 52 percent in the previous month. … More firms reported increases in prices (26 percent) than reported decreases (9 percent),
The US Housing Market
On the same day as we were receiving figures which showed signs of an improvement in the US economy the National Association of Realtors released figures for existing home sales and for the overhang of homes on the market. These can be a little confusing as some figures are seasonally adjusted and some are not! However whilst sales picked up on the previous month to 5.28 million they were 3% down on December last year and whilst the inventory of unsold homes fell to 3.56 million it in fact was up 8.4% on December 2009.
So if we take out the seasonal effects on the housing market by comparing the figures to last years we can see that the situation has worsened. If we add to this the fact that rising bond yields are likely to push mortgage rates higher then we find that overall we are in a familiar situation. That is of signs of improvement in the US economy but a continuing decline in her housing market.
Impact on the Markets: US Government Bond prices fall and yields rise
The better news for the US economy contributed to substantial falls in US Treasury Bond prices and rises in their yields. The 30 year or long bond fell by around 1.5 points and closed with a yield of 4.61%. There were falls in shorter maturities too as yields on the 10 year rose to 3.45% and even the 2 year saw its yield rise to 2.05%. So a trend on which I have reported frequently continued and if it is sustained it will feed into higher mortgage rates which will have their impact on the US housing market.
Another measure used is to compare the two-year bond with the 30 year bond to give an idea of what investors think of the long- term prospects for the US economy. Here there are concerns as the yield spread is now 2.56%. However some care is needed as the easy assumption is to blame inflation expectations except that there was an auction of inflation linked bonds yesterday and it struggled a little. I think that whilst investors are unsure of the longer-term implications of the implications of the asset purchases of the US central bank they are not yet fully convinced of the inflationary implications. However they are worried enough to want higher yields on longer maturities as compensation for the increased potential dangers.
On the day there was a slight irony as part of its so-called QE2 programme of asset purchases the US Federal Reserve bought some US $2.2 billion of 17 to 30 year bonds, but as you can see from the price action it didn’t help much. In the background some may be wondering a little more about the position of the Federal Reserve itself as it is the biggest holder of US Treasury Bonds due to all its purchases and falling prices must mean an increasing build up of losses. There has been concern expressed over the way that it has recently changed its accounting procedures whereby it now reports and adjusts its position daily with the US Treasury. Now whilst this does represent a change it is more presentational rather than functional. What I mean by that is that the US Treasury and thereby the US taxpayer stood behind the Federal Reserve before so it was never going to be declared insolvent. However the changes do add to a feeling of unease over US policy and may have contributed accordingly to the rise in yields.
UK Retail Sales stagnate
The Office of National Statistics has produced some concerning figures on this subject today. This give a different picture to the recent trend in the UK economy of figures which have generally been favourable.
The volume of retail sales in December 2010 was unchanged compared to the same month a year earlier.
Interestingly the main fall was in food sales which fell by 3.4% whilst non-food rose by 3.1%. If you think about it various strands are involved here as if you blame the snow and bad weather then why did food sales fall as presumably the colder weather would ordinarily support more food consumption? Perhaps we are seeing the impact of higher food prices and a possible increase in consumption of cheaper foods. The report does show that food prices are estimated to have increased by 5% over the past year.
So an intriguing report which goes against the recent trend. However one should not place too much weight on one month’s retail sales figures as the series can be erratic we will have to see what future months tell us.
UK Housing Market problems continue and business lending drops too
Just to add to the uncertainty created by the retail sales figures the Bank of England has produced more worrying statistics on the UK housing market. This is a sector which has been showing signs of struggling for quite some time unlike the overall UK economy which has been performing more strongly. There is an obvious similarity with the state of the US economy I have reported on above.
The figures showed that the 6 main UK mortgage lenders who represent approximately 75% of the UK mortgage market approved 40,000 mortgages in December which is down considerably from November’s 45,000. Just to give an idea of the drop off in this market in 2007 we were seeing consistently over 100,000 approvals per month and even in the summer of 2009 we saw figures heading towards 60,000 per month. Now again the weather may have been a factor but these figures continue a disappointing trend.
Whilst reading the report I spotted something else too.
The stock of lending to UK businesses fell in the three months to November. The stock of lending to small and medium-sized businesses continued to contract, but syndicated lending facilities to UK businesses increased.
This is troubling on several counts.Firstly we keep being told that conditions in the bank lending area are improving and that targets are being met.Secondly we can see that bank provided finance for small businesses is particularly weak. When Japan hit trouble her government ordered her banks to lend (sound familiar?) but what actually happened was that they hit the targets by giving the money to companies which did not actually need it. These figures may well be pointing in the same direction if bank lending is going in the main to larger companies as many of them are relatively cash rich. There are many problems with the target culture which has taken over the world and this highlights one of them. I gather that the world of advanced physics has a not dissimilar problem whereby actually observing some particles appears to change them. This problem in economics has been highlighted by Goodhart’s Law.
These latest lending figures do have concerns in them and highlight in my view that our banking system has a long way to go before we can say it has recovered. We do have elements of the so-called zombie bank culture and it remains my view that it would be better to reform them completely. The originator of this report does not escape blame either because in its rush to withdraw the Special Liquidity Scheme the Bank of England is withdrawing around £9 billion a month from the system and this is likely to have contributed to the lack of finance available.