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THE FRONT VIEW
Volume 1 / Issue 2 – July 2016
GAUGES
-
GDP – 1.1 ↓
-
Interest Rates – .25%
-
Unemployment – 4.9 ↓
-
ISM – 53.2 ↑
-
Inflation – 1.0
-
Consumer Sentiment –
89.5 ↓
HIGHLIGHTS
-
Appears to be a slowdown
in capital spending
-
Corporate profits have
stabilized
-
Consumers are still
driving the economic
growth
SUMMARY OF THE ECONOMY
The latest Durable Goods shows a contraction of capital
spending, automobile units sold is down over 10%, factory
orders are down over 3%. On the positive side, new home
sales is up over 8%, and retail sales are slightly, +2.5%. Since
this last article, the price of oil has stabilized just under $45 up
from $35 a barrel. Employment is stabilizing indicating a sign
of continued buying in the future.
The British vote to exit the European Union remains to be
seen as to the economic impact. Some have called it a mild
impact to the US economy, to a global recession. Which
means nobody knows. Like a divorce, this will take some time
to unravel, and for more details to highlight the true impact.
China’s PMI showed the weakest in five months. Japan’s PMI
is under 50 indicating manufacturing contraction.
One month of positive data is not conclusive, so I tend to look
at trends and take into account seasonality changes. In
general, the U.S. economy continues to be on a slow growth
path, not showing robust growth or contraction. The global
economy appears to be showing signs of sluggish growth.
GLOBAL ECONOMY
China’s growth is pretty much on target in 2016 of 6-7% GDP. With reduced stimulus, growth is
expected to slow in the latter half of 2016. Household consumption contributes over 70% of China’s
GDP.
China’s exports are headed up after the Chinese New Year. Long term export trend looks like it is flat
to heading down. The latest Manufacturing PMI from China for June 2016 is reported at 48.6, below the
50 level for growth. 2
China’s exports goods to the world. China’s major exports are
mechanical and electrical products (approx 41% of total exports),
high tech (approx 20%), clothing, textiles, footwear, furniture,
plastic and ceramics (approx 16%), motors and generators(5%),
and integrated circuits (approx 5%).3
China seems to be holding it own, 6-7% growth is better than
what the rest of the world is doing.
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Eurozone inflation is at 0.1% in June 2016, well below the target of 2%. Eurozone growth rate is .6% for
the first three months of 2016, higher than prior quarter of 0.4%.1 Eurozone PMI was reported at 51.9 in
July 2016, down from a June reading of 52.8. The Eurozone unemployment rate is 10.1% in May. 8 This
varies from country to country, with Germany at 4.2% and Spain/Greece at 19.8%/24.1% respectively in
March 2016. All sounds like enemic growth in Europe compared to the rest of the world.
Just to cover other parts of the world, Brazil’s manufacturing PMI is 43.2 in June, up from 41.6 in May,
but well below the 50 considered to be expansion.
USA ECONOMY
After a sluggish first quarter of 2016, it looks like employment is picking up, housing market continues
to be robust due to the Fed keeping interest rates steady. Here is a summary of some key economic
data:
Economic Data
Latest
Date
Current
Prior
Period
Year Ago
Trend:
Yr -Yr%
Chg
Note
GDP
Capacity Utilization
(%)
New Home Sales
(1000’s units)
New Housing Starts
(k)
Inventory to Sales
Ratio
1Q16
May
1.1
74.9
1.4
75.3
0.6
78.2
2.1 ↑
-4.2 ↓
May
551
586
507
8.6 ↓
May
1,138
1,130
1,063
9.5 ↑
Up
Jan
1.40
1.36
4.51 ↑
Getting up to 2008
levels
1972-2015 average is
80.0
PMI
June
53.2
51.3
53.1
0.0
Consumer Price
Index (CPI)
Rate of Inflation (%)
May
240.2
239.3
237.8
1.0 ↑
June
1.0
1.1
0.0
-
Consumer
Sentiment
July
89.5
93.5
91.9
-2.2 ↓
Unemployment Rate
June
4.9
4.7
5.3
-7.5 ↓
> 50 manufacturing
expanding. 3 months
in a row over 50.
Government target
less than 2.0%
Are recent world
events causing this
downturn?
The jobs market appears to be robust, retail sales is holding it’s own, energy prices have been steady
to lower creating additional income for families.
Let’s go up the food chain and look at manufacturing and services productivity. This data is from the
Institute of Supply Management (ISM). Basically a PMI under 50 indicates manufacturing is contracting.
The latest data shows a PMI of 51.3% in June 2016. 4 In summary, it shows new orders, production
growing, employment and inventories growing. The ISM non-manufacturing index registered 56.5% in
June vs 52.9% in May, boasted by new orders, new business, and employment. 5
Let’s look at retail sales, since consumer spending drives over 70% of the economy. Retail sales is
up .6% in June from the prior month, beating expectations of 0.1%. 6 If you exclude auto and gas sales,
retail sales rose .5. Motor vehicles, furniture, building materials, and restaurant spending are up,
electronics, appliances, and clothing sales are down.
Initial jobless claims measures new and emerging unemployment 7, foretelling signs of job growth. The
Initial Jobless claims shows a downward trend. This bodes well for a continuing economic growth, as
people have jobs and spending increases.
The Michigan Consumer Sentiment is a widely watched indicator of the overall health of the economy
from consumers. July came in 89.5, a 4.0 decrease from the prior month. 9 A one month drastic
change does not make a trend, so we will need to see in the next few months if there is a major shift
going on.
The latest news from the Federal Reserve is to not raise interest rates. Though the Fed is still
pondering one to two rate increases by year end. There is some concern of increasing rates in a
weakening global economy. Also with the presidential elections so near, I don’t expect a rate hike til
after the elections.
MARKETS
The stock market in 1st quarter 2016 has gone from bear territory back into bullish phase. Bad news –
BrExit, terrorist attacks, sluggish economy does not appear to deter the markets from moving higher.
Question I posed last quarter and still is a question, “What will drive the markets higher?” Corporate
profits appear to be trending downward. It is projected to trend to around 1326Billion USD by 2020. 11
The US Government 10 year bond is at 1.57% as of July 25th. Just as a note, the yield reflects inflation
expectations and the likelihood that the debt will be repaid. The yield has been trending lower since Jan
2016.
REAL ESTATE
New homes construction is up in June, continuing a trend up, see chart below. Existing home sales also
were up in June. The S&P/Case Shilling index on home prices shows home values up 5.4% year to
year in April 2016.12 2016 indicates a good year for the housing industry. Mortgage rates have been
trending lower in recent months. Supply of houses are somewhat below normal, and may tend to drive
prices up in certain parts of the country.
The 30 year mortgage rates has been trending down since the beginning of 2016 to average rate of
3.6%. The forecast is projected to trend toward 6.5% in 2020. 14
COMMODITIES
Oil has been trending downward since late 2014, and currently is around $44/barrel.
Gold has made a comeback since the beginning of 2016 as investors look for safe haven from a
turbulent world. Gold is currently around $1,300, up from $1,050 at the end of last year.
The US Dollar Index has declined about 4.2% from the beginning of the year to around $97. Could this
boost commodity prices? The US dollar has been strong since mid 2014. A strong dollar makes US
exports more expensive abroad.
SOME THOUGHTS FOR YOUR THOUGHTS - INFLATION
Very few of us remember high inflation we had back in the 70’s and 80’s. With that also came high
interest rates. I remember buying my first house back then, interest rate on the mortgage was 13.5%. It
was the best I could get at the time, and that was normal. Now it seems outrageous and crazy.
So what causes inflation? First the definition of inflation is the rate at which prices of goods and
services is rising and consequently, the purchasing power of money is falling. There are three main
causes of inflation, 1) demand pull, 2) cost push, 3) monetary policy. 13 Demand pull is supply and
demand of goods or services. More demand than supply and prices rise higher. Example is limited
supply of housing and more people wanting to buy will raise house prices. Cost push can occur from
such actions as wage increases, natural disasters, or government regulation and taxation. Monetary
policy is the Federal Government controlling the money supply. Money supply includes cash, credit,
loans, and mortgages. When loans are cheap, there is too much money chasing too few goods and
services, hence creating inflation, again a supply and demand equation.
With the US Government’s expansion of the money supply over the past 5-7 years, this begs the
question – “Will we see rampant inflation in the future”.
No, I don’t have an answer to the question posed. But it is an interesting thought.
The following is an interesting snapshot of the components that makeup the Consumer Price Index,
and the components cummulative price change since 2000. 15 As would be expected we are all feeling
the effects of inflation on Medical Care.
Everybody complains about college being so expensive. Below is the College Tuition subcategory of
Education and Coommunications.
What’s of concern is both Medical Care and College Tuition are trending upward at a steep slope with
no signs of leveling off.
ABOUT THE AUTHOR
David Lau is Allied’s Chief Technology Officer, “Rocket Scientist,” Chef, Martial Arts extraordinaire, and
In-House economist. David Lau joined Allied in April 2007 as Chief Technology Officer. He is
responsible for all aspects of information technology, workflow processes and facilities management,
including identifying technology solutions. He is always on the lookout for innovative and cutting edge
strategies that will deliver Allied’s services more efficiently. He is our resident “go to guy” for anything
and everything technology related. David has a strong background in systems engineering, customer
interfacing and product life cycle management with both small and large corporate process exposure.
He has start-up, corporate and international experience, as well as expertise in the financial, defense,
telecommunications and computer industries.
Prior to joining Allied, David was the Co-Founder and President of Dallas-based System Solutions
Group, Inc., where he managed a staff placement, consulting and custom development company for
the Internet and telecom industry. He built a start-up business that generated $1 million revenue in the
first 18 months, securing a major contract with Verizon. This company was successfully acquired by
another telecom business he co-founded where he developed sales of over $2 million and generated
proposals of over $60 million in new business opportunities. Prior to that, he worked as a Senior
Systems Engineer for Texas Instruments for over 18 years, where he also worked on drones. David has
a Bachelor of Science degree in Electrical Engineering from Virginia Polytechnic Institute and graduate
work in Computer Science at Southern Methodist University. He also holds various patents. David
enjoys cycling, traveling, photography, reading, cooking, and trying out new restaurants and cuisines.
David also teaches martial arts and is a car enthusiast.
References:
1) http://www.tradingeconomics.com/euro-area/gdp-growth
2) http://www.tradingeconomics.com/china/manufacturing-pmi
3) http://www.tradingeconomics.com/china/exports
4) https://www.instituteforsupplymanagement.org/ismreport/mfgrob.cfm
5) https://www.instituteforsupplymanagement.org/ismreport/nonmfgrob.cfm
6) http://www.tradingeconomics.com/united-states/retail-sales
7) http://www.tradingeconomics.com/united-states/jobless-claims
8) http://www.tradingeconomics.com/euro-area/unemployment-rate
9) http://www.tradingeconomics.com/united-states/consumer-confidence
10) https://research.stlouisfed.org/fred2/series/ISRATIO
11) http://www.tradingeconomics.com/united-states/corporate-profits/forecast
12) http://www.tradingeconomics.com/united-states/case-shiller-home-price-index
13) http://useconomy.about.com/od/inflationfaq/f/Causes-Of-Inflation.htm
14) http://www.tradingeconomics.com/united-states/mortgage-rate/forecast
15) http://www.advisorperspectives.com/dshort/updates/CPI-Category-Overview
Disclaimer: The information presented here is not a recommendation to act on this information. Nor
does it represent the views of the presenting party. The information presented has been derived from
sources that are believed to be accurate.